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How the Tequila Crisis Shook Up Mexican Politics and Boosted NAFTA

By Vincent DueñasContributing Writer
4 October 2017

For 71 years, the Institutional Revolutionary Party (PRI) dominated the Mexican political system with unequivocal efficiency by establishing a social contract with society and operating a dynamic, closed patronage network. The Tequila Crisis of 1994 caused the PRI to look north for reprieve. The U.S.-sponsored financial bailout of 1995 saved the Mexican economy, but also dealt the final blow to PRI’s dominance in 2000. The El Barzón movement that rose in response to the bailout terms captured the same inclusive socio-economic spirit of the Mexican Revolution, shook the political establishment of the country, and accelerated Mexico’s integration into the North American Free Trade Agreement (NAFTA). Mexico today is no longer in the same position as it renegotiates NAFTA. The benefits to hemispheric security as a result of NAFTA, however, have included stronger market and manufacturing environments, while security cooperation has simultaneously increased. The goal today should be to continue NAFTA and update it to enhance trade in the energy sector. These updates should focus on oil and natural gas, by reducing remaining tariffs, increasing efficiency through technological exchange and enhancing North American energy self-sufficiency.

The Tequila Crisis and Financial Bailout

Between the late 1980s and the early 1990s, Mexico privatized the banking system with few regulatory restrictions, which subsequently resulted in rampant speculative actions by the banks. Between 1991 and 1994, Mexican banks' debt to international banks increased from $8 billion to $15.5 billion and the stock of outstanding international bonds rose from $1 billion to $3.8 billion, thus leaving Mexico immensely vulnerable to fluctuations in exchange rates. These developments could not be hidden from foreign investors, who identified the trend and began to pull out of the Mexican market, starting the “Tequila Crisis”. In response, the Mexican government began to artificially support the Mexican peso in 1994 to prevent a financial collapse.

The reality of the crisis that became evident to the PRI by the end of 1994 led to the announcement of the recently elected president, Ernesto Zedillo Ponce, of the devaluation of the peso, thus causing a complete halt to foreign investment and the rapid defaulting by debtors who no longer had any purchasing power. In January of 1995, the United States government, along with the International Monetary Fund (IMF) provided a combined $50 billion financial rescue package in response to the “Tequila Crisis” to prevent the complete collapse of the Mexican economy and banking system.

Recognizing that the “Tequila Crisis” represented a great liability to the US, the bailout was done under the auspices of protecting U.S. and international investments, as well as stemming the perceived increase in migrant flows that would result from a Mexican depression. The cost of the bailout for Mexico was the repatriation of Mexican banks, high interest rates, increased austerity measures, and an acceleration of provisions under the recently signed NAFTA.

By allowing the banks to transfer parts of their ‘bad’ portfolio to the government, Mexico ensured that the banks would not default. This removal of the borrowers’ debt burden was limited to those banks that had engaged in debt speculation and was done using the Banking Fund for Savings (FOBAPROA), a national trust initially created to protect Mexican bank deposits. More than half the defaulted debt derived from only 605 loans and 2,000 debtors accounted for 80 percent of the total liabilities absorbed through FOBAPROA, with insolvent banks purchased from shareholders for double the amount investors had paid when the institutions had been previously privatized. The use of FOBAPROA for this purpose was seen as the ultimate insult, with the citizenry paying for bankers’ failures.

El Barzón and Political Fallout

The “Tequila Crisis” was symptomatic of broader cultural conflicts that were brewing as a result of the monopoly of power that the PRI had during their democratically-elected political reign. In the year prior to the crisis, Mexico was confronted by social unrest; two political leaders were assassinated, while the province of Chiapas was confronted with violence and doubts loomed about the fairness of the presidential elections of 1994. The social unrest became the backdrop for the perceived corruption that plagued the PRI and led to the injustice of the financial crisis. Although targeted for a 20% drop, the reality was an almost 50% drop (Figure 1) when the peso was devalued. Inflation increased to 52% at the same time, erasing all purchasing power (Figure 2).

Figure 1: Exchange Rate (Source: Banco de Mexico)

Figure 2: Inflation (Source: Banco de Mexico)

A previously obscure group called El Barzón, named after farm equipment, rose to defend debtors in the aftermath of the crisis. The group mobilized and grew to 500,000 members, defending self-described ‘debt slaves’ who viewed the debts created by the banks as illegitimate. The movement rallied around a slogan that translated to “I owe, I don’t deny it, but I will pay what is fair.” The unique aspect of the El Barzón movement, however, is that it represented a cross section of society that included middle-class and upper middle-class households that had not previously been politically active. Through a combination of demonstrations, filing of legal actions, and advocacy, they successfully renegotiated the terms that debtors had to pay, providing relief to a population that had experienced default through no fault of their own.

NAFTA for Hemispheric Security

The “Tequila Crisis” and El Barzón movement arose from very poor fiscal policies combined with decisions based on political expediency. The fallout then forced the terms of NAFTA at an accelerated rate. The PRI paid the price between 2000 and 2012, as the PAN took control of the presidency. Then in 2012, Enrique Peña Nieto’s win signaled the return of the PRI. Although he has had a difficult term, presiding over renewed increases in drug violence and failing to accomplish all of his campaign promises, Mexico today is in a decidedly better bargaining position for NAFTA renegotiations. The country is no longer in the grips of crises so great that they are not willing to walk away from the negotiations without a renewed NAFTA agreement.

The two movements ended up stabilizing the Mexican economy, by instilling confidence in foreign investors through stricter fiscal restrictions, quickening the implementation of NAFTA provisions and strengthening the economic and security partnerships of the U.S., Mexico and Canada. When NAFTA was first implemented, the energy sector was not accessible to outside investors. Only as recent as 2014, has Mexico begun to open up to foreign investments in gas and oil. Mexico, today, is the 11th largest oil producer in the world with 9.7 billion barrels of proved oil reserves, accounting for 9% of U.S. crude imports. In natural gas, Mexico is a net importer of U.S. natural gas and is replacing oil consumption with natural gas as its energy needs increase. The U.S. should focus on modernizing the NAFTA agreement to increase trade in oil and natural gas by reducing tariffs as much as possible, thereby capitalizing on proximity and growing demand between the three countries. A further streamlining of administrative hurdles would allow developing technology to increase efficiency in the production and transportation of oil and natural gas. Regional integration would then deepen throughout North America, improving the countries’ energy self-sufficiency.

As NAFTA renegotiations continue, it is also important to note that the opening of Mexico’s energy sector was not exclusive to NAFTA countries. Extra-regional actors, such as China, have documented strategies to increase their influence in the Western Hemisphere and gain access to energy, telecommunications, and high-technology sectors, among others, through as many markets as they can, such as with Mexico and NAFTA. Just last year, the Chinese national oil company, CNOOC, acquired rights to explore for oil along the U.S.-Mexico border. The most beneficial path for the U.S. and Mexico would be an arrangement where the relationship is deepened, thus providing increased hemispheric interdependence and energy self-sufficiency, which in turn would improve security cooperation.

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Vincent A. Dueñas is a recent graduate of the Master of International Public Policy degree program at the Johns Hopkins School of Advanced International Studies in Washington, DC. He is a US Army Foreign Area Officer focused on Latin America with experience living and traveling throughout the region. The views reflected are his own and do not represent the opinion or official position of the United States government or any of its agencies.

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